From: Garabedian, John GARABEDJ
Sent: Tuesday, May 18, 1999 8:49AM
Subject: Amazon Drops Prices Yet Again!!
does this make sense, we lose sellling books at 1/3 off, so let's sell a whole bunch more at 1/2 off. Is this not a Ponzi scheme. this move attracts new stock holders who provide new money to cover the new losses and on and on until a day of reckoning when the new money stops coming?....
Amazon Drops Prices on Bestsellers
Internet juggernaut Amazon.com (Nasdaq: AMZN) <http://quote.fool.com/simple.asp?Symbols=AMZN> is raising the stakes in the online bookselling business, increasing its discount on New York Times bestsellers to 50% off of suggested retail price. Starting today, the company will pass this discount to both hardcover and paperback books in the lists of three categories: fiction, nonfiction, and advice/how-to/miscellaneous. The stock fell $10 1/4 to $122 1/8 this morning. Considering that Amazon.com is already losing money before this price cut, it may seem odd to some people that the company is reducing prices further. But in reality, the logic is actually quite reasonable given the current market environment.
Amazon is in much more than the bookselling business. Although a significant portion of sales currently come from books, the company also sells music and video products. It has also started up an auction site and purchased stakes in drugstore.com and pets.com, which benefit from exposure to Amazon's growing 8 million+ customer base. The prosperity of Amazon's business down the road lies not in selling books, but in being the Internet's dominant retailer.
While the absolute level of Internet consumer sales is fairly small today, continued explosive growth seems likely as people become more familiar and comfortable with online transactions. To develop relationships with customers coming online, Amazon is more than willing to give up a little margin on books to draw more people through its door. This strategy has been used for decades by retailers, most commonly grocery stores with their weekly "super specials."
Conventional wisdom holds that the Internet is an equalizer in terms of competition and barriers to entry. Since comparison shopping involves only a few clicks, consumers can easily hop around from site to site to find the best deal. The reality is turning out to be quite different. Almost anyone can easily set up a site and start selling items on the Net, but it is much harder to develop a database of millions of book reviews, create a bond with customers, and provide excellent service. While the theoretical barriers to entry are small, the realistic barriers are quite high. Lowering prices to expand its reach, Amazon is again raising the bar against competitors even higher.
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